Global Stocks Surge to Record on Powell; Bonds Gain: Markets Wrap

Global stock markets hit record highs on Thursday, fueled by a delayed jubilation over the Federal Reserve's big cut to interest rates. The S&P 500 surged 1.7%, while the tech-heavy Nasdaq 100 jumped 2.5%, pushing a gauge of global stocks to a new peak. The rally was widespread, with the company behind Olive Garden and Ruth's Chris, Darden Restaurants, leading the way in the S&P 500 with an 8.3% gain. Nvidia, meanwhile, soared 4% and was one of the strongest forces lifting the S&P 500. The surge in tech stocks was driven by an advance in AI technology and lower interest rates, which weaken criticism of their high valuations.

The rally came after the Federal Reserve delivered the first cut to interest rates in more than four years late on Wednesday. The move closed the door on a run where the Fed kept its main interest rate at a two-decade high in hopes of slowing the U.S. economy enough to stamp out high inflation. Now that inflation has come down from its peak two summers ago, Chair Jerome Powell said the Fed can focus more on keeping the job market solid and the economy out of a recession. Powell's comments did little to alter expectations implied by market pricing that the Fed will cut rates again when it meets later this month.

Wall Street is having a delayed reaction to an interest rate cut. Investors seem to be betting that the Fed's pivot toward easier monetary policy signals a "recalibration" of policy rather than an urgent move to prevent a recession. This optimism is bolstered by a couple of reports on the economy released Thursday, including a drop in weekly jobless claims and a rosy Beige Book report from the Fed. However, some investment banks have raised their forecasts for how much the Federal Reserve will ultimately cut interest rates, anticipating even deeper reductions than Fed officials.

Lower interest rates have a significant impact on financial markets. They ease the brakes on the economy by making it easier for U.S. households and businesses to borrow money. They also give a boost to prices of all kinds of investments, from gold to bonds to cryptocurrencies. Bitcoin rose above $63,000 Thursday, up from about $27,000 a year ago.

An adage suggests investors should not "fight the Fed" and should instead ride the rising tide when the central bank is cutting interest rates. Wall Street was certainly doing that Thursday. However, this economic cycle has thrown out conventional wisdoms repeatedly after the COVID-19 pandemic created an instant recession that gave way to the worst inflation in generations. Wall Street is worried that inflation could remain tougher to fully subdue than in the past, and while lower rates can help goose the economy, they can also give inflation more fuel. The upcoming U.S. presidential election could also keep uncertainty reigning in the market.